AGENCY EXAM APPROACH —Questions to ask: 1.) Is there a Principal-Agent relationship/and what type? 2.) If so, does the issue involve a TORT or CONTRACT? Agency : An agency is a fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject to the principals control. o There are three parts : 1.) Manifestation of consent by the principal that the agent act on the principal’s behalf; AND 2.) subject to the principal’s CONTROL; AND 3.) the agent manifests CONSENT Three players in agency Questions: 1.) The Principal 2.) The Agent 3.) The Third Party
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AGENCY
EXAM APPROACH—Questions to ask:
1.) Is there a Principal-Agent relationship/and what type?
2.) If so, does the issue involve a TORT or CONTRACT?
Agency:
An agency is a fiduciary relationship that arises when one person (a
principal) manifests assent to another person (an agent) that the
agent shall act on the principal’s behalf and subject to the principals
control.
o There are three parts :
1.) Manifestation of consent by the principal that
the agent act on the principal’s behalf; AND
2.) subject to the principal’s CONTROL; AND
3.) the agent manifests CONSENT
Three players in agency Questions:
1.) The Principal
2.) The Agent
3.) The Third Party
Agency Problems Involving Contract: When facing a fact pattern where
a contract is involved the question is whether the principal is not whether the
principal is liable, but whether the principal is bound by the agent’s actions.
General rule: An agent has the ability to bind a principal to an
agreement, provided that the agent has some form of authority.
Types of Authority : 1.) actual authority, 2.) apparent authority,
3.) ratification, and 4.) agency by estoppel.
o 1.) Actual Authority (Express and Implied):
Actual authority exists when P communicates to A about
the activities in which the agent may engage and the
obligations the agent may undertake. This
communication may be spoken Or written (express
actual authority). It may be through silence or implied
by the job (implied actual authority).
Actual Express Authority —
Involves examining the principal’s explicit
instructions.
Actual Implied Authority —
Involves examining P’s explicit instructions and
asking what else might be reasonably included in
those instructions (i.e. implied) to accomplish the
job.
Implied authority includes actions that are
necessary to accomplish the principal’s original
instructions to the agent; it also includes those
actions that the agent reasonably believes the
principal wishes him to do, based on the agent’s
reasonable understanding of the authority
granted by the principal.
o 2.) Apparent Authority
Apparent authority is created when a person (principal
or apparent principal) does or says something or
creates a reasonable impression/manifestation that
another person (the apparent agent) has the authority
to act on behalf of that apparent principal.
It is about what a third party reasonably believes the
principal has authorized the agent to do.
o 3.) Ratification—“Authority given after the fact”:
Ratification is the authority granted after the contract
has been made. It involves situations in which an agent
enters into an agreement on behalf of the principal
without any authority (actual or apparent).
P’s affirmation may be express or implied (i.e. implied
by accepting the benefits of the transaction).
Once agreement or transaction has been ratified the law
treats it as if it were originally done by the agent with
actual authority. Thus, binding both parties to the
agreement (i.e. principal and third-party).
To be VALID, P must know or have reason to know, at
the time of the alleged ratification, the material facts
relating to the transaction.
P MAY NOT PARTIALLY RATIFY a transaction. P must
ratify the whole transaction. Its all or nothing.
Limitations on Ratification:
If a third party manifests an intention to withdraw
from the transaction, prior to ratification, the
principal may not ratify the agreement.
Ratification will be denied when necessary to
protect the rights of innocent third parties.
Ex. Annie (agent) enters into an agreement
with Ted (third-party) to sell Pat’s (Principal)
house on day one. On day two, P’s house
burns down. P cannot ratify on day three
and say “Ok, I accept the agreement.” (P.
22)
Ratification might also be denied if the passage of
time affects the rights and liability of a third
party.
o Questions to ask to determine whether there is a valid
ratification:
A.) Did P through word or deed manifest his
assent to affirm the agreement?
B.) Will the law give effect to that assent?
o 4.) Agency by Estoppel: (P.23)
Estoppel is not really a form of authority. Estoppel is an
equitable doctrine which prevents the principal from
denying that an agency relationship exists.
Estoppel generally arises in agency situations in which
the principal has done something improper.
As used in agency, estoppel involves:
1.) Acts or omissions (generally wrongful) by the
principal, either intentional or negligent, which
creates an appearance of authority in the
purported agent.
2.) The third party reasonably, and in good faith,
acts in reliance on the appearance of authority.
3.) The third party changes her position in reliance
upon that appearance of authority.
Difference between between ESTOPPEL and
APPARENT Authority:
1.) Estoppel requires that the third party
alter his or her position in reliance on the
purported authority.
There is no such requirement for apparent
authority.
2.) Apparent authority requires a
manifestation by the principal (directly or
indirectly) to the principal.
No such manifestation is required for
estoppel, merely some culpable act or
omission by the principal.
Estoppel might arise when the principal
takes some improper action. Yet, the
improper action is not sufficient to amount
to a manifestation to the third party.
o Inherent Agency power:
This is a term used by the restatement of Agency to
indicate the power of an agent which is derived not from
authority, apparent authority or estoppel, but solely
from the agency relation and exists for the protection of
persons harmed by or dealing with a servant or other
agent. (Statute bk, 2)
Agent’s Liability for Contracts
Liability of--Undisclosed Principal: (P.22/29)
o Definition--A principal is undisclosed when the principal
authorizes an agent to act on the principal’s behalf with
respect to third parties, but the principal is undisclosed and
the third party is unaware that the principal exists.
Agent acts with authority:
If the agent acts with the principal’s actual,
express or implied, authority, then the principal
is bound.
There can be no apparent authority with an
undisclosed principal, because an undisclosed
principal by definition cannot have made a
manifestation to the third party.
These situations are covered under the concept of
liability of an undisclosed principal (was formerly
known as “inherent agency”).
Under this concept the law will sometimes
hold an undisclosed principal liable for
certain unauthorized transactions of his
agent when a third party has made a
detrimental change in position, if the
principal had notice of the agent’s conduct
and that it might induce third parties to
change their positions, and the principal did
not take reasonable steps to notify the third
parties of the facts. (Third Restatement
Agency § 2.06)—P.23
Liability of Partially Principal for Contract :
o A partially disclosed principal exists when an agent tells a
third party that the agent is acting on behalf of a principal,
but the identity of the principal is not disclosed. (P.30)
Liability of Agent for Contract:
o General Rule-- An agent is not liable as a party to the
contracts that the agent enters into on behalf of a disclosed
principal.
o There are two situations when an agent will be treated
as a party to a contract:
1.) Agent is acting on behalf of an undisclosed
principal; OR
2.) Agent is action on behalf of a partially disclosed
principal (i.e. unidentified principal).
o In both instances, the agent is bound by the agreement
at the election of the third party. The third party may
choose to sue the authorized agent OR principal.
UNLESS the parties specifically agree that the agent
will not be bound OR the original agreement provides
that, upon identification of the principal, the agent will
no longer be bound.
o However, in most situations in which the agent would
be found liable under an agreement the agent would
have a claim for indemnification provided that the agent
acted with P’s authority and did not cause the breach of the
agreement. (P.30)
EXAM APPROACH (Questions to Ask): (P. 28-29)
1.) Did Principal give Actual Authority to the Agent (*either express
or implied)?
2.) Did the principal make some manifestation to the third party
creating Apparent Authority?
3.) Was the Principal undisclosed, creating liability of an undisclosed
principal (formerly Inherent Agency Power (IAP))?
4.) Did the Principal ratify the contract?
5.) Is Estoppel an issue?
o Did P do something wrong or fail to do something, that
created an impression with the third party?
o Did the third party rely and alter his or her position to his or
her detriment?
Agency Problems Involving Torts:
1.) First determine whether an employee/employer
relationship existed.
o Asses whether the principal had the right to exert control
over the manner and the means by which the agent
performed his duty.
It is not just the actual exercise of control that is critical.
It is also the right to exercise control that is evaluated.
Factors involved in assessing P’s right to exert control
over A:
1.) Extent of control that the agent and principal
have agreed the principal may exercise over the
details of the work.
2.) Whether A is engaged in a distinct occupation
or business
3.) Whether type of work done by agent is
customarily done under P’s direction or without
P’s supervision.
4.) The skill required in A’s occupation
5.) Who supplies the tools or instrumentalities
required for work and place to perform work?
6.) Length of time A is engaged by P
7.) Whether A is paid by the job or by time worked
8.) Whether P and A believe they are creating an
employment relationship; AND
9.) Whether the principal is or is not in business.
Employee vs. Independent Contractor :
Under the doctrine of Respondeat Superior, P is
responsible for the torts committed by its
employee within the course and scope of
employee’s employment. Generally, P is not
responsible for the torts of their independent
contractors.
Non-Employee Agents and independent
contractors: It is possible to have an agency
relationship in which the agent is not an employee.
The Third Restatement refers to some individuals
as non-employee agents. Other sources still use
the term independent contractors
Rule:
When a fact pattern involves an
independent contractor OR a non-employee
agent, if the tort occurs over an area which
the principal exercises some control, the
principal might still be liable. (SEE Fiona
example on p. 15)
EXCEPTIONS to independent contractor rule:
There are certain situations in which a principal is
still liable for the torts of an agent who Is not an
employee and over whom the principal exercises
no control. Those situations are:
1.) Inherently dangerous activities—any
activity likely to cause harm or damage
unless some precautions are taken.
2.) Non-delegable duties—a duty that a
person may not avoid by the mere
delegation of the task to another person.
The hiring of the agent to perform the task
will not discharge or transfer the principal’s
responsibility or liability.
3.)Negligent hiring—this is not about
vicarious liability. Rather, it is direct
negligence. Liability is based on the
principal’s negligence in hiring the
independent contractor, not on attributing
responsibility for the tortuous act to an
independent contractor or to an innocent
principal.
2.) Was Agent/employee acting within Scope of
employment?:
o Intentional Torts:
Principals/employers are not liable for the intentional
torts of their agents/employees.
Exception:
However, when the employer’s job is such
that some part of the intentional tort might
be characterized as being done with the
intent of serving the employer P will be
liable.
o Ex. Club bouncer who ejects patron
from the club.
o Frolic & Detour:
1.) Frolic—when an agent leaves employment to do
something for personal reasons.
2.) Detour—If an employee is still engaged in
employment but strays only slightly from the direct
assignment, that is known as a mere “detour.”
Ex. An agent who is driving to the bank to deposit
money for the store which employs him and takes
a longer route so he can drive by the new
sculpture in the park is on a detour.
If he gets in an accident while driving by
the sculpture, the employer will still be
liable.
3.) Apparent Agency: (P.16-19)
o Apparent agency arises in situations in which the person
committing the tort is not an employee , or perhaps not even
the agent, of the principal.
Under the traditional agency analysis, P would not be
liable for the alleged agent’s tort. However, if there are
circumstances which led the injured third-party to
reasonably believe that an employment or agency
relationship existed between the P and alleged A and
those circumstances existed because of some action or
inaction on the part of P, then P might still be liable
under the theory of apparent agency.
Many courts (but not all) require proof that if the
alleged agent was under the control of P, then P
would or could have exercised control to avoid the
tort which took place.
REMEMBER:
o The Agent is always liable for his own negligence.
o Also, the principal always responsible for his or her own
negligence (in such an situation the doctrine of respondeat
superior does not ably).
EXAM APPROACH—TORT (Questions to ask):
1.) Is there an Employee—Employer relationship?
2.) If the agent is an employee, did the tort occur within the scope
of the employment or was it clearly outside the scope (frolic or
detour)?
3.) Even if there is NO Employee/Employer relationship—is there
sufficient control to create a “non-employee agent,” and if so, did
the tort occur within the scope of that control?
4.) Even if there is no control exercised over agent, does the event
fall into an exception such as an: i.) inherently dangerous activity,
ii.) a non-delegable duty, OR iii.) negligent hiring?
5.) If there is no liability for the Principal under a control analysis, is
there a claim for Apparent Agency because the third party
reasonably relied on the appearance of the agency and was harmed
as a result of the reliance?
Rights and Responsibilities: (P.32-33)
Agent—The agent has certain duties and obligations to P. The
agent’s knowledge is imputed to P.
o 1.) Duty of care, competence, and diligence
o 2.) Duty of loyalty
o 3.) Duty not to acquire material benefits arising out of the
agency
o 4.) Duty not to act as (or on behalf of) an adverse party
o 5.) Duty not to Compete
o 6.) Duty not to use the principal’s property
o 7.) Duty not to use confidential information
o 8.) Duty of good conduct
o 9.) Duty to provide information
NOTE :
o While some of these duties may be waived by the principal,
such a waiver requires that the principal ne fully informed and
that the agent still act in good faith and still deal fairly with
the principal. (P.33)
Principal—The principal has certain duties and obligations to the
agent. (P.34)
o 1.) Duty to indemnify
o 2.) Duty of good faith and fair dealing
Partnership
Background:
Partnerships are generally governed by state law. Most states have
adopted some version of the Uniform Partnership Act (1997) (RUPA
—which stands for the “revised Uniform Partnership Act”). The
codified versions of RUPA are known as the default rules, because
the apply if the partnership is not governed by an agreement or if
the partnership agreement does not cover a particular area.
Although most provisions of RUPA can be modified by an agreement
there are some that cannot.(See P. 41)
NOTE —No formal partnership agreement is needed, but it is
recommended.
Types of Partnership
1.) General Partnership (Outline based on general partnerships)
2.) Limited Liability Partnerships
3.) Limited Liability Companies
Partnership
A partnership is :
o 1.) An association of two or more persons
o 2.) To carry on as co-owners of a business
o 3.) For profit.
Attributes Associated with a Partnership:
1.) Each partner is jointly and severally liable for the debts of the
partnership
2.) Each partner has the ability to participate in the control and
management of the partnership.
o Under the Uniform Partnership Act (1997) (RUPA)—Each
partner is entitled to at least one vote regardless of how much
capital he or she contributed.
3.) In a partnership profits are shared equally. So, when a
partnership is dissolved, the money is divided up among the
partners.
4.) TAX—Partnerships are not taxed on their income.
5.) Partners owe each others owe each other the highest level of
fiduciary duty.
Partnership by Estoppel
There are instances, even if someone is not a partner in a
partnership, where he or she might still be responsible for the debts
of the partnership.
o Ex.
In a partnership by estoppel, if A, B, and C are partners,
and X Is not a partner, X still can be held liable as a
partner IF X allows the partners to act in a way that
third parties reasonably believe X to be a partner. (P.41)
To be liable under this theory, X must make some
manifestation which creates an impression,
allowing others outside the partnership to
reasonably believe that X is a partner; AND the
third party claiming partnership by estoppel must
rely on that impression to his or her detriment.
(P.42)
Partnership by Estoppel requires: (P.42)
o 1.) Actual reliance—
o 2.) Reliance must be reasonable—
o 3.) Some manifestation (by the alleged partner)—
Difference between Partnership by Estoppel and Apparent
Authority:
o
Fiduciary Obligations of Partners –(“The punctilio of an honor most
sensitive”):
1.) Partnership Duty of Loyalty:
2.)
o
CORPORATIONS
CORPORATIONS
Background:
Corporations are a method of doing business. It enables promoters to do
business through them. The corporation is the one doing the business. The
law treats corporations as legal persons as opposed to natural persons.
There are articles of corporation filed with the secretary of state (the
date they are filed that is the corps birth date)
By-Laws: There are set of rules for running the corp.
When the corporation wants to conduct business, natural persons
that are in charge of its affairs natural persons have to conduct
meetings.
A record of those meetings are called MINUTES.
The agreements (resolutions) made in the meetings are called RESOLUTION.
A Corp. can own shares in another corp.
Shareholders—are the owners of the corporation. They provide the capital
to the corp. and receive corps. Residual net profits (after creditors are paid).
The shares are evidenced by stock certificates. You keep a certified copy in
the corporate notebook and the original in a safety deposit box.
Shareholders are required to meet once a year. In that meeting one of their
primary functions is to elect a board of directors and consent to any changes
to any organizational fundamental issues (i.e. changes in articles of
incorporation)
Board of directors (highest level of fiduciary duty to the corp.)—is a high
position of power in corp. They have the exclusive power to manage the
corporations business. They determine if and when dividends are paid.
They are not required to contribute any money to corp. or share in losses.
They are the guardians of the corporation.
They do not get to share in the profits of the crop. as a member of the board
of directors. However, they can be compensated or not as part of the board
of directors.
Note: A shareholder could also be on the board of directors.
Board of directors elect the officers of the corporation. The officers work day
to day in the corporation. Its their job. They are responsible for carrying in
day to day business (9 to 5 job)
Example:
President, VP, secretary, CEO, CFO,
They are fiduciaries of the corporation
Dejure corportaion—A straightforward corp. formed by filing articles of
incorp. With secretary of state.
Corp. by Estoppel
Third party seeking to avoid a contract.
Elements:
1.) The court treats a firm that is not incorporated as if it were
2.) if a third person regarded them as such
3.) and third person would gain a windfall if they court now failed to
recognize the firm as a corp.
Benefits:
Allows individuals to take risks shielding them from personal liability (or
limited liability). This is the hallmark of doing business as a corporation.
Allows individuals to take risks in commerce. Allows more people to take
risks and develop business.
Defacto Corp
Elements:
1.) Promoters tried to incorporate in good faith
2.) had legal right to do so
3.) AND acted as a corporation.
Southern-Gulf Marine Co. No. 9, Inc. v. Camcraft, Inc.
Corporation by Estoppel
Facts:
Plaintiff, Southern-Gulf Marine Co. No. 9, Inc., contracted with Defendant,
Camcraft, Inc., to buy a supply vessel from Defendant. Defendant refused to
comply with the agreement, arguing that the contract was invalid because
Plaintiff was not incorporated in Texas as the initial agreement stated.
Enterprise Liability
involves a bunch of different corporation. The plaintiff wants to include all of
the assets of each of the separate corporation that are operating in a single
enterprise. The plaintiff wants to pool the assets of the corporation in order
to pay for damages suffered.
Walkovszky v. Carlton
Piercing the Corporate Veil
Sea-Land Services, Inc. v. Pepper Source
Piercing the Corporate Veil:
General Rule :
o Generally, the owners of a corporation, as well as the
directors and officers can not be held personally liable for the
obligations of the corporation.
Exception :
o However, in some circumstances, even though a corporation
has been validly formed, the courts will hold the shareholders,
officers, or directors personally liable for the corporations
obligations to avoid fraud or in justice.
Van Dorn test—2 PRONG TEST (for Piercing the Corporate
vail) (P. 213-14)
o A corporate entity will be disregarded and the veil of the
limited liability pierced when two requirements are met:
PRONG (1.) there must be such unity of interest and
ownership that the separate personalities of the
corporation and the individual [or other corporation] no
longer exist;
Four Factors —to determine whether a
corporation is controlled by another to justify
disregarding their separate identities:
i. the failure to maintain adequate corporate
records or to comply with corporate
formalities;
ii. The comingling of funds or assets;
Iii. Undercapitalization; AND
Iv. One corporation treating the assets of
another corporation as its own.
PRONG (2.) circumstances must be such that
adherence to the fiction of separate corporate existence
would sanction a fraud or promote injustice.
Board of Directors (Control):
The Board of Directors are in charge of managing the corporation.
The Board of Directors hold office until the next annual meeting
unless the Articles of Incorporation states otherwise.
They can delegate duties relating to management to Officers who
are employees of the corporation.
The Board of Directors is vicariously liable for the actions of the
officers.
The Board of Directors selects the employee/officers and
determines how much salary they will make.
If a shareholder is not an employee, then the shareholder will only
receive money through dividends.
The Board of Directors determines how much, if any dividends will
be paid.
There decisions are limited by fiduciary duties, but they their
decisions are also protected by the business judgment rule.